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| EELN > SEC Filings for EELN > Form 10-Q on 9-Aug-2005 | All Recent SEC Filings |
9-Aug-2005
Quarterly Report
The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the financial statements and the related notes thereto included elsewhere in this Form 10-Q. This discussion contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below, as well as those discussed below under "Factors Affecting Future Operating Results." The Company disclaims any obligation to update information contained in any forward-looking statement. See "Forward-Looking Statements."
OVERVIEW
The Company is an online consumer direct lender, specializing in mortgage, home equity and auto loans. As a retail lender, the Company is heavily impacted by economic conditions (such as interest rates) and seasonal/cyclical factors. To help mitigate this, the Company has focused on its diversified revenue products, which consist of purchase and non-prime mortgage loans, home equity loans and lines of credit, and auto loans. Additionally, the Company strives to be a low-cost provider with a vision of driving overall prices lower, which creates marketing efficiency. The result is a virtuous cycle connecting efficiencies in capital markets, operations and customer acquisition.
RESULTS OF OPERATIONS
The following table sets forth the unaudited results of operations for the
Company as a percentage of total revenues for the periods indicated (in
thousands, except per share amounts):
Three Months Ended Six Months Ended
June 30, June 30,
2004 2005 2004 2005
----------- ----------- ----------- -----------
Revenues .............................................. $ 33,399 $ 39,876 $ 64,030 $ 78,261
Operating expenses:
Operations ........................................ 16,264 19,237 31,206 36,832
Sales and marketing................................ 12,506 14,558 23,638 27,967
Technology......................................... 2,091 2,320 4,257 4,795
General and administrative......................... 2,358 3,361 5,874 6,027
----------- ----------- ----------- -----------
Total operating expenses.................... 33,219 39,476 64,975 75,621
----------- ----------- ----------- -----------
Income (loss) from operations.......................... 180 400 (945) 2,640
Other income, net...................................... 10 22 25 34
----------- ----------- ----------- -----------
Income (loss) before taxes............................. 190 422 (920) 2,674
Income taxes........................................... -- (13) -- (46)
----------- ----------- ----------- -----------
Net income (loss)...................................... $ 190 $ 409 $ (920) $ 2,628
=========== =========== =========== ===========
Net income (loss) per share:
Basic.............................................. $ 0.00 $ 0.01 $ (0.01) $ 0.04
=========== =========== =========== ===========
Diluted............................................ $ 0.00 $ 0.01 $ (0.01) $ 0.04
=========== =========== =========== ===========
AS A PERCENTAGE OF REVENUES:
Revenues .............................................. 100 % 100 % 100 % 100 %
Operating expenses:
Operations ........................................ 49 % 48 % 49 % 47 %
Sales and marketing................................ 37 % 37 % 37 % 36 %
Technology......................................... 6 % 6 % 7 % 6 %
General and administrative......................... 7 % 8 % 8 % 8 %
----------- ----------- ----------- -----------
Total operating expenses.................... 99 % 99 % 101 % 97 %
----------- ----------- ----------- -----------
Income (loss) from operations.......................... 1 % 1 % (1)% 3 %
Other income, net...................................... -- % -- % -- % -- %
----------- ----------- ----------- -----------
Income (loss) before taxes............................. 1 % 1 % (1)% 3 %
Income taxes........................................... -- % -- % -- % -- %
----------- ----------- ----------- -----------
Net income (loss)...................................... 1 % 1 % (1)% 3 %
=========== =========== =========== ===========
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Revenues
The Company is a consumer direct lender whose revenues are derived primarily from the gain on sale of mortgage, home equity and auto loans that it underwrites, funds and sells. The Company also earns interest income on mortgage and home equity loans during the brief time they are held pending sale.
The following table provides the components of revenue shown in thousands and as a percentage of total revenues:
Three Months Ended Six Months Ended
June 30, June 30,
2004 2005 2004 2005
----------- ----------- ----------- -----------
Revenues:
Mortgage............................................ $ 17,089 $ 18,109 $ 32,597 $ 34,895
Interest income on mortgage loans................... 2,428 3,124 3,687 5,861
Home equity......................................... 8,738 11,825 18,293 22,072
Interest income on home equity loans................ 944 2,255 1,424 3,645
Auto................................................ 2,921 2,474 5,983 7,968
Closing services.................................... 984 1,804 1,435 3,241
Other............................................... 295 285 611 579
----------- ----------- ----------- -----------
Total revenues................................ $ 33,399 $ 39,876 $ 64,030 $ 78,261
=========== =========== =========== ===========
Mortgage............................................ 51 % 45 % 51 % 45 %
Interest income on mortgage loans................... 7 % 8 % 6 % 7 %
Home equity......................................... 26 % 30 % 29 % 28 %
Interest income on home equity loans................ 3 % 6 % 2 % 5 %
Auto................................................ 9 % 6 % 9 % 10 %
Closing services.................................... 3 % 5 % 2 % 4 %
Other............................................... 1 % -- % 1 % 1 %
----------- ----------- ----------- -----------
Total revenues................................ 100 % 100 % 100 % 100 %
=========== =========== =========== ===========
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The following table summarizes dollar volume of loans sold and the revenue in both dollars and average basis points ("BPS") (dollars in thousands except BPS):
Three Months Ended Six Months Ended
June 30, June 30,
2004 2005 2004 2005
---------- ---------- ---------- ----------
Mortgage
$ Volume $ 899,073 $ 880,024 $1,656,179 $1,689,711
Revenue $ 17,089 $ 18,109 $ 32,597 $ 34,895
BPS 190 206 197 207
Home Equity
$ Volume $ 331,673 $ 347,671 $ 633,923 $ 683,700
Revenue $ 8,738 $ 11,825 $ 18,293 $ 22,072
BPS 263 340 289 323
Auto
$ Volume $ 161,936 $ 112,532 $ 315,825 $ 241,171
Revenue $ 2,921 $ 2,474 $ 5,983 $ 7,968
BPS 180 220 189 330
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Mortgage Revenues. The Company's mortgage revenues are derived from the origination and sale of loans. Mortgage loans are funded through the Company's warehouse lines of credit and sold to mortgage loan purchasers typically within thirty days. Mortgage loan revenues consist of proceeds in excess of the carrying value of the loan, origination fees less certain direct origination costs and other processing costs. These revenues are recognized at the time the loan is sold. Mortgage revenues consist of refinance mortgage revenues and diversified mortgage revenues - which are comprised of purchase and non-prime mortgage loans.
Total mortgage revenue increased $1.0 million to $18.1 million for the three months ended June 30, 2005 from $17.1 million for the three months ended June 30, 2004. Mortgage revenues increased $2.3 million to $34.9 million for the six months ended June 30, 2005 from $32.6 million for the six months ended June 30, 2004. While overall rates have risen during this time, periodic dips in rates have resulted in continued mortgage refinance fundings. The increase in revenue though is primarily due to increased gain on sale in basis points.
The following table summarizes dollar volume of mortgage loans sold and the revenue in both dollars and average basis points ("BPS") (dollars in thousands except BPS):
Three Months Ended Six Months Ended
June 30, June 30,
2004 2005 2004 2005
---------- ---------- ---------- ----------
Refinance Mortgage
$ Volume $ 496,332 $ 443,200 $ 906,234 $ 918,042
Revenue $ 8,430 $ 9,244 $ 16,888 $ 19,140
BPS 170 209 186 208
Diversified Mortgage
$ Volume $ 402,741 $ 436,825 $ 749,946 $ 771,669
Revenue $ 8,659 $ 8,865 $ 15,709 $ 15,755
BPS 215 203 209 204
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The following table reflects the percentages of the Company's mortgage closed loan volume from purchase and refinance loans as compared to the total market (according to Mortgage Bankers Association of America) through the second quarter of 2005. The Mortgage Bankers Association of America data for the second quarter of 2005 below represents its estimate as of July 12, 2005:
Q1 04 Q2 04 Q3 04 Q4 04 2004 Q1 05 Q2 05
-------- -------- -------- -------- -------- --------- ---------
E-LOAN Mortgage*
Purchase 37% 37% 44% 35% 38% 33% 39%
Refinance 63% 63% 56% 65% 62% 67% 61%
Total Market*
Purchase 47% 51% 67% 58% 56% 54% 60%
Refinance 53% 49% 33% 42% 44% 46% 40%
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* Excludes home equity and auto loan volume
Home Equity Revenues. Home equity revenues are derived from the origination and sale of loans. Home equity loans are funded through the Company's warehouse lines of credit and sold to home equity loan purchasers in approximately forty days from funding. Home equity loan revenues consist of proceeds recorded at settlement in excess of the carrying value of the loan, origination fees less certain direct origination costs and other processing costs. These revenues are recognized at the time the loan is sold. Home equity revenues increased $3.1 million to $11.8 million for the three months ended June 30, 2005 from $8.7 million for the three months ended June 30, 2004. Home equity revenues increased $3.8 million to $22.1 million for the six months ended June 30, 2005 from $18.3 million for the six months ended June 30, 2004. The increase in home equity revenue is due to increase in gain on sale in basis points, as well as slight increases in sold loan volume.
Interest Income on Mortgage and Home Equity Loans. The Company generates revenues from interest income on mortgage and home equity loans. The revenues realized are based on the loan amount multiplied by the contractual interest rate from the time of funding by the Company through time of sale. These revenues are recognized as earned during the period from funding to sale. Interest income is correlated to the volume of loans funded. While funded volume was up in the period for both Mortgage and Home Equity loans, the increase in interest income is primarily the result of loans being held longer, prior to sale. As such, interest income on mortgage increased $0.7 million to $3.1 million for the three months ended June 30, 2005 from $2.4 million for the three months ended June 30, 2004. Interest income on mortgage increased $2.2 million to $5.9 million for the six months ended June 30, 2005 from $3.7 million for the six months ended June 30, 2004. Interest income on home equity loans increased $1.3 million to $2.2 million for the three months ended June 30, 2005 from $0.9 million for the three months ended June 30, 2004. Interest income on home equity loans increased $2.2 million to $3.6 million for the six months ended June 30, 2005 from $1.4 million for the six months ended June 30, 2004.
Auto Revenues. The Company funds prime auto loans using a line of credit and sells them either via whole loan sales or to a QSPE. Revenues from sales to the QSPE consist of the estimated future cash flows net of pre-payments and credit losses. Revenues on prime auto loan sales to the QSPE are recognized when the loan is sold to the QSPE. In addition, in exchange for the loans sold, the Company receives cash proceeds and records a retained interest. The retained interest is an interest-earning asset. The difference between the estimated discounted cash flows and the actual cash flows received over time will be accreted and included as auto revenue.
From June 2002 to March 2005, the Company sold auto loan receivables to E-LOAN Auto Fund One, LLC, a QSPE. On March 30, 2005, Merrill Lynch Bank USA purchased $651 million in auto loans held by E-LOAN Auto Fund One, LLC. The Company received $16.4 million in net proceeds associated with the liquidation of E-LOAN Auto Fund One, LLC's assets, which resulted in a $2.7 million increase in the fair value of the Company's retained interest in the purchased auto loans. As the retained interest asset was classified as a trading asset, the fair value adjustment was included in current period income as a component of auto revenue. As of the purchase date, E-LOAN Auto Fund One, LLC was no longer a qualifying special purpose entity (QSPE) as there were no external beneficial interest holders remaining. In accordance with EITF 2002-09, "Accounting for Changes That Result in a Transferor Regaining Control of Financial Assets Sold", the Company deferred gain recognition on approximately $475 thousand in auto loans retained by E-LOAN Auto Fund One, LLC and consolidated the assets in the Company's financial statements. As of June 30, 2005, the remaining deferred balance was approximately $300 thousand.
In June 2005, the Company created and began selling auto loan receivables to E-LOAN Auto Fund Two, LLC, a QSPE. The retained interest asset is classified as a trading asset and any fair value adjustments will be included in current period income as a component of revenue.
In July 2004, the Company began selling a portion of its prime auto loan production to Merrill Lynch Bank USA pursuant to a Purchase and Sale agreement. The revenue on these loans is based on a fee derived from the composition of the loans being sold, and is recognized at time of transfer. Prior to the third quarter of 2003, sub-prime auto loans were sold to sub-prime auto loan purchasers. The revenue on these loans consisted of the mark-up to the lending partner's loan price or a set origination fee. These revenues were recognized at the time the loan was sold. Loan applications that do not meet the prime auto lending criteria are referred out to other sub-prime lenders in exchange for a fee.
Auto revenues decreased $0.4 million to $2.5 million for the three months ended June 30, 2005 from $2.9 million for the three months ended June 30, 2004. The decrease in the three months ended June 30, 2005 is due to a decline in sold loan volume, offset by small increases in revenue per loan. Auto revenues increased $2.0 million to $8.0 million for the six months ended June 30, 2005 from $6.0 million for the six months ended June 30, 2004. The six months ended June 30, 2005 includes a one-time gain of $2.7 million related to the increase in fair value of the company's retained interest, which was liquidated on March 30, 2005. Excluding this gain, auto revenue decreased $0.7 million mostly due to decreased sold loan volume.
Closing Services Revenues. In the fourth quarter of 2003, the Company formed Escrow Closing Services, Inc. ("ECS"), a wholly-owned subsidiary, which provides mortgage closing services, including HUD-1 and document preparation and signing, disbursement and recording services for a portion of our home equity business. In the first quarter of 2005, ECS began offering appraisal services for a portion of the company's mortgage business. Closing services revenues increased $0.8 million to $1.8 million for the three months ended June 30, 2005 from $1.0 million for the three months ended June 30, 2004. Closing services revenues increased $1.8 million to $3.2 million for the six months ended June 30, 2005 from $1.4 million for the six months ended June 30, 2004. The Company expects that closing services revenue will continue to grow throughout 2005 as volume increases.
Operating Expenses
Total Operating Expenses. Total operating expenses include operational costs associated with the origination of mortgage, home equity and auto loans, including interest expense on warehouse lines, as well as costs associated with marketing, technology and administrative.
The following table provides detail of the Company's total operating expenses classified by major types of expense, expressed as a percentage of total operating expenses:
Three Months Ended Six Months Ended
June 30, June 30,
2004 2005 2004 2005
--------- --------- --------- ---------
Compensation & Benefits 40% 37% 42% 38%
Processing Costs 10% 10% 9% 9%
Advertising & Marketing 34% 34% 33% 34%
Occupancy & Administrative 12% 11% 12% 11%
Interest Expense on Warehouse 4% 8% 4% 8%
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As a large portion of the total operating expenses of the Company are compensation and benefit related, the following table shows full-time headcount (including temporary and contract employees) by function at the end of each respective quarter:
June 30,
2004 2005
--------- ---------
Mortgage 286 330
Home Equity 288 294
Auto 82 76
Closing Services 20 35
Sales & Marketing 29 28
Technology 59 61
General & Administrative 74 76
--------- ---------
Total 838 900
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Operations. Operations expense is comprised of both fixed and variable expenses, including employee compensation and expenses associated with the production and sale of loans and interest expense paid by the Company under the warehouse and line of credit facilities it uses to fund mortgage, home equity and auto loans held-for-sale.
The following table provides detail of the Company's operations expenses classified by the following revenue-related categories (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2004 2005 2004 2005
----------- ----------- ----------- -----------
Mortgage .............................................. $ 6,877 $ 7,678 $ 13,525 $ 14,604
Interest expense on mortgage loans..................... 1,004 2,015 1,606 3,826
Home equity............................................ 5,247 4,847 10,317 9,819
Interest expense on home equity loans.................. 435 1,191 718 1,977
Auto................................................... 1,836 2,025 3,670 4,026
Closing services....................................... 865 1,481 1,370 2,580
----------- ----------- ----------- -----------
Total operations....................................... $ 16,264 $ 19,237 $ 31,206 $ 36,832
=========== =========== =========== ===========
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Operations expense increased $2.9 million to $19.2 million for the three months ended June 30, 2005 from $16.3 million for the three months ended June 30, 2004. Operations expense increased $5.6 million to $36.8 million for the six months ended June 30, 2005 from $31.2 million for the six months ended June 30, 2004. The increase in both periods was predominantly related to the increase in interest expense in Mortgage and Home Equity loans. Operations expense decreased as a percentage of revenue from 49% to 48% for the three months ended June 30, 2004 and 2005, respectively. Operations expense decreased as a percentage of revenue from 49% to 47% for the six months ended June 30, 2004 and 2005, respectively. The decrease in operations expense as a percentage of revenue was due to increased revenue, partly attributed to the benefit from the sale of loans held by E-LOAN Auto Fund One, LLC in March 2005.
The following table provides detail of the Company's total mortgage operations expenses (excluding interest expense) classified by major types of expense, expressed as a percentage of total mortgage operations expenses (excluding interest expense):
Three Months Ended Six Months Ended
June 30, June 30,
2004 2005 2004 2005
--------- --------- --------- ---------
Mortgage Operations
Headcount & Related 46% 47% 47% 49%
Commissions 21% 22% 20% 21%
Processing Costs 19% 20% 19% 19%
Facilities & Other 14% 11% 14% 11%
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The following table provides detail of the Company's total home equity operations expenses (excluding interest expense) classified by major types of expense, expressed as a percentage of total home equity operations expenses (excluding interest expense):
Three Months Ended Six Months Ended
June 30, June 30,
2004 2005 2004 2005
--------- --------- --------- ---------
Home Equity Operations
Headcount & Related 58% 59% 58% 61%
Commissions 12% 15% 12% 14%
Processing Costs 19% 17% 18% 16%
Facilities & Other 11% 9% 12% 9%
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The following table provides detail of the Company's total auto operations expenses (excluding interest expense) classified by major types of expense, expressed as a percentage of total auto operations expenses (excluding interest expense):
Three Months Ended Six Months Ended
June 30, June 30,
2004 2005 2004 2005
--------- --------- --------- ---------
Auto Operations
Headcount & Related 64% 60% 66% 63%
Commissions -- -- -- --
Processing Costs 16% 25% 15% 22%
Facilities & Other 20% 15% 19% 15%
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Direct Margin. Direct margin is defined as revenue minus operations expense, which includes variable and fixed expenses.
The following table provides detail of the Company's direct margin classified by the following revenue-related categories (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
. . .
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